Joint Building Society Special Administrators for Dunfermline Building Society v FM Front Door Limited, [2011] CSOH 175

Tue, 08 Nov 2011 14:41:00 GMT

Application for an administration order in respect of FM Front Door Ltd. The application followed FM’s failure to make payments under a loan from the Dunfermline Building Society obtained to assist with the purchase of flats at the Skyline development on Finniestoun Street in Glasgow. The loan was secured by a floating charge and standard securities over each of the flats. FM’s parent company FM Developments also granted a guarantee for the loan.

Clause 13 of the loan agreement provided that the grounds for default included:

failure to pay sums due under the loan agreement;
inability to pay debts as they fall due (or deemed inability in terms of the Insolvency Act 1986); and
circumstances arising, which in the opinion of the building society, had a materially adverse effect on the ability of FM to perform it’s obligations under the agreement or on the value, validity and enforcement of the security or the security documents.

In terms of the loan agreement, FM were to make quarterly payments to the building society. They failed to do so timeously (in respect of payments due in July and October 2010 also January and April 2011) but on each occasion paid after they were sent reminders by the building society which noted the sum due and the bank account to which it was to be paid. However, when FM again failed to pay the sum due in July 2011, the building society wrote to FM indicating that they were in default and demanding payment of the principle sum with interest.

The defaults on which the building society sought to rely were the late payment of the July instalment, a reduction in the value of the property which in its opinion constituted a materially adverse effect on both FM’s ability to perform its obligations under the loan agreement and also on the value of the securities. It also took the view that the administration of the guarantor, FM Development materially affected the value of the guarantee.

FM argued that it was not in default contending that the parties had varied their contract so that FM did not have to pay the quarterly instalments of interest until the building society had informed it of the sum due and the bank account into which the sum should be paid. Further, FM claimed that the building society had acquiesced in late payment and was personally barred from founding on the delayed payment in July.

Lord Hodge rejected these arguments and granted the administration order sought by the building society.

In terms of the Insolvency Act 1986, before a court can grant an administration order, it must be satisfied that:

the company is or is likely to become unable to pay its debts; and
the administration order is reasonably likely to achieve the purpose of the administration.

Default

Variation of the contract

Lord Hodge was not persuaded that the email correspondence vouched for any variation of contract. It was consistent with the building society politely reminding its borrower that sums were overdue and pressing for payment. It did not establish the agreed practice claimed by FM. Also there was no suggestion that, before the default, anything occurred to cause uncertainty as to the amount due for quarterly payment. On the contrary, the sum due in each quarter remained the same and the bank account into which it was to be paid did not change.

The loan agreement also contained a “no waiver” clause to the effect that failure or delay on the part of the building society to exercise powers or rights under the agreement did not preclude further exercise of the powers or rights. Whilst there is some uncertainty as to the boundaries of the efficacy of “no waiver” clauses, the effect of the clause was that FM could not found on a failure by the building society to assert a default when there had been a delay in making a quarterly payment in order to argue that the building society could not give notice of a default on the occurrence of a further failure to make a payment. Personal bar seeks to prevent unfairness caused by inconsistent behaviour. But in this case FM had to be taken to have been aware of the clause and thus to have known that a failure by the building society to exercise a right or remedy did not amount to an abandonment of that right on a later non-performance.

FM was therefore in default when it failed to make the payment on 1 July 2011.

Materially adverse effects under clause 13

Lord Hodge was also satisfied that the building society has established a default under clause 13. The insolvency of FM’s guarantor, FM Developments was likely to have had a material adverse effect on the value of its guarantee. Further, the building society was entitled to take the view that the fall in value of the flats which FM acquired was likely to have a material adverse effect on the value of its standard securities and on FM’s ability to repay the advances. Whilst both parties relied on different valuations, whichever valuation was taken, it was clear that there has been a material fall in the value of the properties and that the outstanding balance of the loan exceeded their value. That was a position which was materially adverse to the circumstance in 2007 when the building society stipulated that the maximum that it would lend was 85% of the market value of the properties.

The administration order

Inability to pay debts

Having found that the building society was entitled to treat FM as being in default, Lord Hodge was satisfied that FM was unable to pay its debts as they fell due. FM’s failure to repay the principal sum in response to the building society’s demand and the evidence of the current value of its property portfolio demonstrated that inability.

The effect of the administration order

As to whether an administration order was likely to achieve the purpose of the administration, one of the two purposes which the intended administrators advanced was to make a distribution to the building society as a secured creditor. There is no suggestion that they would not be in a position to do so and Lord Hodge was satisfied that it was likely that that purpose would be achieved.

Commercial

Joint Building Society Special Administrators for Dunfermline Building Society v FM Front Door Limited, [2011] CSOH 175